Technical Market Report for December 24, 2016

The good news is: • We are in one of the seasonally strongest periods of the year.

The Negatives

There are none.

The market is consolidating its gains of the past 2 months and the down periods have been limited to 1 or 2 days.

The Positives

Seasonality is the only story right now.

During the week between Christmas and New Years day the market usually drifts upward on low volume.

The first chart covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 40% trend (4 day EMA) of NASDAQ new highs divided by new highs + new lows (OTC HL Ratio), in red. Dashed vertical lines have been drawn on the 1st trading day of each month. Dashed horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the 50%, neutral level.

OTC HL Ratio fell again last week, but finished the week at a very strong 74%.

The next chart is similar to the first one except it shows the S&P 500 (SPX) in red and NY HL Ratio, in blue, has been calculated from NYSE data.

NY HL Ratio rose sharply finishing the week at 83%.

Seasonality

Next week includes the last 4 trading days of the 4th year of the Presidential Cycle. The tables below show the daily change, on a percentage basis for that period.

OTC data covers the period from 1963 to 2015 while SPX data runs from 1928 to 2015. There are summaries for both the 4th year of the Presidential Cycle and all years combined.

Average returns for the coming week have been positive by all measures.

Report for the last 4 days of December. The number following the year represents its position in the Presidential Cycle. The number following the daily return represents the day of the week; 1 = Monday, 2 = Tuesday etc.

OTC Presidential Year 4

Day4

Day3

Day2

Day1

Totals

1966-4

-0.23% 1

-0.70% 2

-0.07% 3

0.27% 4

-0.72%

1970-4

-0.41% 4

-0.01% 5

-0.27% 1

-1.01% 2

-1.71%

1974-4

0.15% 5

-0.08% 2

0.57% 3

1.36% 5

2.01%

1978-4

0.56% 2

0.07% 3

0.79% 4

0.86% 5

2.28%

1982-4

0.57% 5

-0.72% 1

0.31% 2

0.77% 3

0.93%

1986-4

0.10% 3

-0.17% 4

0.18% 5

0.52% 1

0.62%

1990-4

-0.19% 2

0.03% 3

0.61% 4

0.61% 5

1.07%

1994-4

0.06% 1

0.41% 2

0.42% 3

0.76% 4

1.65%

Avg

0.22%

-0.07%

0.46%

0.70%

1.31%

1998-4

0.54% 4

-0.25% 5

-0.28% 1

0.25% 2

0.27%

2002-4

-0.93% 2

1.84% 3

0.72% 4

-3.41% 5

-1.78%

2006-4

1.07% 2

-0.01% 3

0.06% 4

-0.13% 5

0.99%

2010-4

0.35% 5

-1.30% 1

2.67% 2

1.70% 3

3.42%

2014-4

-0.74% 3

-0.14% 4

-0.86% 5

2.00% 1

0.26%

Avg

0.06%

0.03%

0.46%

0.08%

0.63%

OTC summary for Presidential Year 4 1966 - 2014

Averages

0.07%

-0.08%

0.37%

0.35%

0.71%

% Winners

62%

31%

69%

77%

77%

MDD 12/30/2005 1.96% -- 12/31/2001 1.85% -- 12/29/1965 1.37%

OTC summary for all years 1963 - 2015

Averages

0.18%

0.10%

0.23%

0.27%

0.80%

% Winners

69%

50%

62%

71%

69%

MDD 12/29/2000 3.41% -- 12/31/2002 2.69% -- 12/31/2007 2.65%

SPX Presidential Year 4

Day4

Day3

Day2

Day1

Totals

1928-4

0.85% 4

1.44% 5

0.29% 6

1.25% 1

3.83%

1932-4

-0.15% 3

2.27% 4

2.52% 5

-0.43% 6

4.21%

1936-4

-0.70% 1

0.41% 2

1.53% 3

-0.52% 4

0.72%

1940-4

0.48% 5

0.57% 6

0.67% 1

0.09% 2

1.82%

1944-4

-0.46% 3

1.00% 4

1.37% 5

0.00% 6

1.92%

1948-4

-0.72% 2

1.33% 3

0.00% 4

-0.52% 5

0.08%

1952-4

0.15% 5

0.57% 1

0.72% 2

-0.08% 3

1.37%

Avg

-0.25%

0.78%

0.86%

-0.21%

1.18%

1956-4

0.04% 3

-0.09% 4

0.45% 5

0.24% 1

0.65%

1960-4

0.14% 2

0.45% 3

0.47% 4

0.10% 5

1.16%

1964-4

-0.10% 1

-0.31% 2

0.58% 3

0.53% 4

0.71%

1968-4

0.10% 4

-0.39% 5

-0.90% 1

0.06% 2

-1.12%

1972-4

0.63% 5

0.41% 2

0.54% 3

0.96% 5

2.53%

Avg

0.16%

0.01%

0.23%

0.38%

0.79%

1976-4

0.67% 2

-0.40% 3

0.51% 4

0.54% 5

1.32%

1980-4

0.51% 5

-1.13% 1

0.22% 2

0.32% 3

-0.08%

1984-4

-0.17% 3

-0.43% 4

0.31% 5

0.59% 1

0.29%

1988-4

-0.37% 2

0.09% 3

0.84% 4

-0.60% 5

-0.05%

1992-4

-0.14% 1

-0.27% 2

0.19% 3

-0.71% 4

-0.92%

Avg

0.10%

-0.43%

0.41%

0.03%

0.11%

1996-4

0.64% 4

0.13% 5

-0.39% 1

-1.74% 2

-1.36%

2000-4

0.71% 2

1.04% 3

0.40% 4

-1.04% 5

1.10%

2004-4

0.72% 2

-0.01% 3

0.01% 4

-0.13% 5

0.58%

2008-4

0.54% 5

-0.39% 1

2.44% 2

1.42% 3

4.00%

2012-4

-0.48% 3

-0.12% 4

-1.10% 5

1.69% 1

-0.01%

Avg

0.42%

0.13%

0.27%

0.04%

0.86%

SPX summary for Presidential Year 4 1928 - 2012

Averages

0.13%

0.28%

0.53%

0.09%

1.03%

% Winners

59%

55%

82%

55%

73%

MDD 12/28/1937 3.55% -- 12/30/2005 1.61% -- 12/31/2009 1.12%

SPX summary for all years 1928 - 2015

Averages

0.13%

0.28%

0.43%

0.18%

1.01%

% Winners

64%

59%

71%

64%

75%

MDD 12/28/1937 3.55% -- 12/29/1987 2.95% -- 12/28/1931 2.51%

Year 1 of the Presidential Cycle

The Presidential Cycle is made up of 4 years beginning with the year the President is inaugurated.

I identify the cycle as the Presidential Cycle because I believe it is politically motivated. Prior to 1933 gold and silver were the medium of exchange and government had little control over money supply. Gold coins were removed from circulation by executive order in 1933 and redeemability was suspended. Shortly after the confiscation of gold, the currency was devalued to $35 an ounce from $20 (a 40% tax). US citizens could not redeem their gold certificates for gold, but foreigners could until 1971 when Nixon closed the gold window eliminating redeemability entirely and removing any intrinsic value from the currency. With control of the currency politicians are able to manipulate the money supply to their advantage. Assuming this hypothesis is correct, it is not surprising the Presidential Cycle has been changing over the past 80 years.

On average there are 21 trading days in a month. In the charts that follow every month is defined as 21 trading days. If a month has more than 21 trading days some of the days in the middle of the month are not counted. If there are less than 21 trading days some of the days in the middle of the month are counted twice.

The charts below start with the shortest and most recent histories. The last chart is of the Dow Jones Industrial Average (DJIA) with data beginning in 1885.

The first chart shows the Russell 2000 (R2K) with data beginning in 1979. The average of all years is shown in magenta while the average of the 1st year of the Presidential Cycle is shown in cyan.

The next chart shows the OTC with data beginning in 1963. Until the early 1990’s the OTC was a small cap index and its performance was nearly identical to the R2K. In the chart below the average for all years is shown in blue while the average for the 1st year of the Presidential Cycle is shown in cyan.

The next chart shows the SPX with data beginning in 1928. In the chart below the average for all years is shown in red while the average for the 1st year of the Presidential Cycle is shown in cyan.

The next chart shows the DJIA with data beginning in 1885. In the chart below the average for all years is shown in grey while the average for the 1st year of the Presidential Cycle is shown in cyan.

Conclusion

Seasonality is really the only story. For the next week the market should drift upward on low volume.

I expect the major averages to be higher on Friday December 30 than they were on Friday December 23.

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